Focus on corporate code
- Sebi to tighten governance

Mumbai, Jan. 4: The Securities and Exchange Board of India (Sebi) today proposed to tighten corporate governance standards by revising Clause 49 of the listing agreement that listed entities must sign with bourses.

The capital market watchdog floated a discussion paper today that contained proposals designed to bring Clause 49 in line with provisions in the Companies Bill 2012 that was passed last month by the Lok Sabha. It also wormed in some of the well-established governance standards culled from other parts of the world.

It said the objective was to ignite a wider debate on corporate governance. But while doing so, it said it wanted to strike a balance between the costs of compliance for companies and the need to restore the confidence of investors in the capital market.

At present, Clause 49 of the equity listing agreement contains a mix of mandatory as well as non-mandatory provisions. Those that are absolutely essential for corporate governance can be defined with precision and which can be enforced without any legislative amendments are classified as mandatory. Others, which are either desirable or which may require a change of laws, are classified as non-mandatory.

The regulator suggested that companies must take the approval of its minority or disinterested shareholders for managerial remuneration beyond a particular limit and called for enhanced disclosure of remuneration policies.

The paper also proposed several key changes with regard to the mode of selection, tenure and the fiduciary responsibilities of independent directors whose performance will be subject to peer-level scrutiny.

For the first time, Sebi also floated the idea of setting a minimum and maximum age for independent directors and sought public comment on the proposal to limit number of independent directorships that an individual can accept.

The market regulator has also suggested the appointment of an independent director by minority shareholders called the “small shareholder director”. This is designed to plug a shortcoming in the present system where independent directors are picked by the majority shareholders – read promoters. This has led to apprehensions that they occupy their position at the will of the controlling shareholders (promoters) and may, therefore, be prone to act in accordance with the will of the major shareholders, thereby compromising their independence.

SEBI expressed concern that the remuneration paid to the chief executive officers in certain Indian companies was far higher than what their foreign counterparts get. It said listed entities must fix a remuneration policy for the directors, key managerial personnel and other employees in line with the provisions of the Companies Bill 2012.

They will also have to need to disclose in the Board’s report, the ratio of the remuneration of each director to the median employee’s remuneration.

According to SEBI while formulating the remuneration policy, the focus should be on striking a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals.

SEBI said promoters managed most Indian companies, sparking concerns about excessive managerial remuneration to executives who form part of the promoter group. While this could constitute related party transactions (RTP), the Companies Bill prohibits interested shareholders from voting in such transaction approvals. SEBI has, therefore, suggested that companies must take approval of disinterested/minority shareholders for managerial remuneration beyond a particular limit.

The discussion paper also had important suggestions with regard to independent directors. There have been instances of directors resigning from the board, without quoting any reasons and it could be due to their disagreement with the management in certain matters.

To bring the listing requirements in line with the Companies Bill, SEBI has recommended that upon such a resignation, the Board of a company should intimate the Registrar and forward a copy of his resignation along with detailed reasons.

If the suggestions of the discussion paper are accepted, it will also mean that companies will have to evaluate the performance of non-executive directors.

At present, a peer group can review the performance of these directors but it isn’t mandatory. Henceforth, the performance of the independent director will be judged based on his attendance and contribution to the board/committee meetings and this will be considered if he has to be re-appointed.

The discussion paper also mooted corporate governance standards for promoters or controlling shareholders. SEBI said that it would lay down specific fiduciary responsibilities controlling shareholders and also consider the feasibility of mandating relationship agreement between the company and the controlling shareholder that will specify the duties and responsibilities of controlling shareholders.

The regulator also called for companies to come out with succession policies so that they are not affected by a sudden gap in leadership. The discussion paper here mooted that the board of a listed company may be required to ensure that plans are in place for the orderly succession for appointments to the board and senior management. It further said that the viability of mandatory disclosure of succession planning to board or the shareholders at periodic intervals may also be examined.

Some of the other crucial suggestions of the paper was the segregation of the roles of chairman and that of the managing director/CEO in line with the provisions of the Companies Bill and making the framing of a whistleblower policy mandatory for listed companies.

The discussion paper also suggested that companies must take approval of minority shareholders for divestment of major subsidiaries as there have been instances where such subsidiaries have been transferred to controlling shareholders.